ESG Case Study: Steinhoff International

1. Credit analysis:

Steinhoff International are a South African International retail holding company that is dual listed in Germany. In July 2017 Steinhoff issued their first corporate bond, maturing in 2025, rated Baa3 by Moody’s, as shown.

Within CaTo, spread-to-swaps are plotted for all euro, Baa3 rated, consumer-non-cyclical bonds. A fitted curve is plotted through this cohort of bonds to enable relative value analysis. There is a wide dispersion of credit spreads in this bond cohort, reflecting the range of liquidity premia and credit outlook risks in lower rated issues.


A key for the below graph


2. ESG analysis:

Overlaying MSCI ESG ratings for each bond within this cohort creates a CaTo ‘heat map’, differentiating MSCI ESG ratings by colour.

ESG-aware investors would find that the median ESG rating of this cohort is quite low, at BB. Steinhoff was also rated BB, as shown, and further investigation quickly revealed the reasons for this rating.



3. ESG due diligence:

Steinhoff scored fairly well on its Environmental ESG score, as shown. However, it scored poorly in Social and Governance criteria, particularly due to MSCI concerns regarding the deterioration of accounting practices, including extreme revenue and expense recognition.

Moody’s did not highlight these risks when providing their rating for the Steinhoff 2025 bond issue.



4. ESG risks realised:

In December 2017 Steinhoff disclosed accounting irregularities for the previous two years of published accounts. The CEO, Chairman and CFO all resigned shortly thereafter.

The Steinhoff 2025 bond fell 50% in value in the week of the announcement. Moody’s followed immediately with a downgrade to B1 and the Caa1 three weeks later.

Given the ESG risks highlighted by MSCI through 2016 & 2017, ESG-aware Investors would have considered these risk factors when making their investment decisions and would likely have avoided holding Steinhoff bonds.


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